On 7 June 2016 the Italian insurance supervisory authority (IVASS) published the Regulation No. 24/2016 (the Regulation), which contains new provisions governing investments and assets covering technical provisions for insurance companies. The Regulation replaces ISVAP Regulation No 36 of 31 January 2011 and implements EIOPA Guidelines on Governance and Solvency II requirements.
The new regulatory framework set forth by the Regulation applies to insurance and reinsurance companies authorised in Italy (and to Italian branches of foreign insurance and reinsurance companies) and provides for the key principles of investment management and the investment policies requirements, the internal control system and risk management requirements, the rules concerning derivatives and the rules dealing with assets eligible for covering technical provisions.
In line with Solvency II new approach insurance companies are required to define their investment policies according to the prudent person approach and the other general principles laid down in the Regulation so as to ensure on a continuous basis that their assets are sufficient to cover any outstanding liabilities. In such a perspective, companies’ portfolio diversification is required.
The board of directors of the insurance company is required to adopt a ‘master resolution’, to be reviewed at least once a year, defining the policy on investment management, the policy on asset and liabilities management and the policy on liquidity risk management.
According to Article 5 of the Regulation, the investment management policy embodies a specific set of information, including, inter alia:
- an outline of the strategic investment policy that the company intends to achieve and the procedures for its implementation;
- a description of the expected ROI;
- a description of the criteria to be used in identifying the eligible assets for technical reserves and the definition of relevant utilisation limits;
- a definition of the criteria for the selection of the investment and the definition of the investment categories;
- the concentration investment limit;
- the criteria set forth in regard of derivatives; and
- the criteria set forth in regard of direct lending.
Internal control system and risk management
The Regulation requires that companies’ self-assessment on their financial situation is inspired by the prudent person principle (with specific reference to the eligible assets for technical provisions) and is aimed at verifying, among the others, the compliance of the financial management with the investment policies and the consistency of the transactions with the prevailing market conditions.
Rules on derivatives
The Regulation introduced a new and more detailed set of rules dealing with the use of derivatives by insurance companies. In particular, derivative transactions must be consistent with a balanced and prudent portfolio management and in line with the contents and objectives of the investment policy.
Derivative transactions may be entered into if, amongst other, the following requirements are met:
- the notional amount is coherent with the financial situation of the insurance company;
- the transaction is entered into for hedging purposes and is aimed at an efficient management of the investment portfolio of the Insurance company (evidence of the benefits in terms of risk reduction shall be detailed by the same);
- the company owns assets sufficient to cover the commitments arising from the transaction;
- the internal control system shall be adequate to prevent, measure and monitor the risks associated with the use of derivatives;
- a registration system for the monitoring of the positions under the transactions in place has been adopted and proper procedures and methodologies are in place in order to verify eventual losses.
Certain additional conditions are set forth for OTC derivatives, including trading with investment grade counterparties.
Specific provisions are set forth in regard to the use of derivatives in relation to eligible assets for technical provisions and in relation to unit-linked and index-linked insurance products.
In line with the risk-oriented and forward-looking approach of Solvency II (and differently from the previous Regulation No. 36/2011), the Regulation does not provide for a specific list of eligible assets to cover technical provisions and lays down a set of principles aimed at ensuring that insurance companies focus on the identification, measurement and proactive management of risks and adopt a more prospective focus.